State banks Land Bank of the Philippines (LandBank) and Development Bank of the Philippines (DBP) are paying a hefty price for their P75 billion infusion into the lethargic Maharlika Investment Fund (MIF).

The MIF is supposed to be the country’s first sovereign wealth fund which by definition must be built up through fiscal surpluses.

Instead, it obtained seed capital of P125 billion from LandBank, DBP and the Bangko Sentral ng Pilipinas.

The infusion had a greater impact on DBP, as evidenced by its request for an extension of regulatory relief from the BSP for the second consecutive year.

During the year that it remitted its P25 billion contribution to Maharlika, DBP’s capital ratios went below the regulatory minimum of 10 percent, according to veteran banker Alexander Escucha, president of the Institute for Development and Econometric Analysis Inc.

In remitting its equity contribution to Maharlika, the DBP was complying with Section 6.2 of RA 11954, or the Maharlika Investment Fund Act of 2023, but at the same time it violated Article III, Section 12 of the same law, which specifically states that its equity investment should not exceed 25 percent of its equity.

Escucha said DBP also violated Section 24 of the General Banking Act (RA 8791) which limits “equity investments in allied undertakings” to 25 percent of the bank’s equity.

Complying with the General Banking Act meant that with a total equity of P82 billion as of December 2023, the maximum amount that DBP was allowed by law to remit was only P20.5 billion or 25 percent of equity at the time of remittance.

Based on the banker’s computation, the contribution resulted in DBP breaching the minimum regulatory capital in violation of BSP’s manual of regulations for banks, the General Banking Act, and even the Maharlika Law (RA 11954) which resulted in the need to recapitalize DBP, as called for by the IMF.

Escucha indicated that the capital the DBP infused into the MIF was equivalent to taking out P190 billion of its lending capacity based on a leverage ratio of 7.5x, as he calculated from the DBP audited financial statement.

From the foregone lending capacity of P190 billion, DBP would have earned incremental net interest income of P5.6 billion on a net interest margin (NIM) of 2.95 percent, which was a 2024 figure. The return on equity (RoE) of the bank could also have improved to double digits.

Top universal banks have a NIM of at least 4 percent, which Escucha said is what economists refer to as the “opportunity cost” of taking out the money from DBP into the yet dormant MIF.

He said that a better scheme would have placed on DBP a “capital call” in which the equity contribution is remitted only when the money is actually needed or when the projects to be funded are identified, and vetted.

While DBP attempted to downplay suggestions of financial distress, stating that it remains well-capitalized despite the MIF capital contribution, it is seeking an extension of its exemption from strict regulatory standards.

The relief DBP is seeking is from the minimum capital requirement and renewal of prior requests for dividend relief which would temporarily suspend the declaration of dividends of at least 50 percent of the prior year’s net income until the capital shortfall is addressed.

Escucha said that since any fresh capital infusion from the national government is out of the question, the capital build-up can only be achieved through earnings.

The perception of trouble in a bank, however, precludes opportunities of gain that makes it more problematic for the state bank to regain its footing.